ExErcisEs: sEt BApplications of Accounting Concepts Related to Accrual AccountingE1B. concEpt ▶ HCL Tech. Company’s accountant makes the assumptions or per-forms the activities listed below. Tell which of the following concepts of accrual account-ing most directly relates to each assumption or action: (a) periodicity, (b) continuity, (c) accrual accounting, (d) revenue recognition, (e) deferral, and (f) accrual.

1. In estimating the life of a building, assumes that the business will last indefinitely. 2. Records a sale when the customer is billed. 3. Postpones the recognition of a one-year insurance policy as an expense by initially

recording the expenditure as an asset. 4. Recognizes the usefulness of financial statements prepared on a monthly basis even

though they are based on estimates. 5. Recognizes, by making an adjusting entry, wages expense that has been incurred but

not yet recorded. 6. Prepares an income statement that shows the revenues earned and the expenses

incurred during the accounting period.

Application of Conditions for Revenue RecognitionE2B. concEpt ▶ Four conditions must be met before revenue should be recognized. In each of the following cases, tell which condition has not been met:

a. Company A accepts a contract to perform services in the future for $2,000. b. Company B ships products worth $3,000 to another company without an order from

the other company but tells the company it can return the products if it does not sell them.

c. Company C performs $10,000 of services for a firm with financial problems. d. Company D agrees to work out a price later for services that it performs for another

company.

Adjusting Entry for Unearned RevenueE3B. Carmel of Fargo, North Dakota, publishes a monthly magazine featuring local restaurant reviews and upcoming social, cultural, and sporting events. Subscribers pay for subscriptions either one year or two years in advance. Cash received from subscrib-ers is credited to an account called Magazine Subscriptions Received in Advance. On December 31, 2014, the end of the company’s fiscal year, the balance of this account is $840,000. Expiration of subscriptions revenue is as follows.

During 2014 $175,000During 2015 415,000During 2016 250,000

Prepare the adjusting entry for December 31, 2014.

Adjusting Entries for Prepaid InsuranceE4B. An examination of the Prepaid Insurance account shows a balance of $16,845 at the end of an accounting period, before adjustment. Prepare journal entries to record the insurance expense for the period under the following independent assumptions: 1. An examination of the insurance policies shows unexpired insurance that cost

$8,270 at the end of the period. 2. An examination of the insurance policies shows insurance that cost $2,150 has

expired during the period.

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Chapter Assignments 1

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2 Chapter 3: Adjusting the Accounts

Adjusting Entries for Supplies: Missing DataE5B. Each of the following columns represents a Supplies account:

a b c dSupplies on hand at July 1 $264 $346 $196 $ ?

Supplies purchased during the month 113 ? 174 1,928

Supplies consumed during the month 194 972 ? 1,741

Supplies on hand at July 31 ? 436 85 1,118

1. Determine the amounts indicated by the question marks. 2. Make the adjusting entry for column a, assuming supplies purchased are debited to an

asset account.

Adjusting Entry for Accrued SalariesE6B. Larson Company has a five-day workweek and pays salaries of $35,000 each Friday.

1. Prepare the adjusting entry required on May 31, assuming that June 1 falls on a Wednesday.

2. Prepare the journal entry to pay the salaries on June 3, including the amount of sala-ries payable from requirement 1.

Revenue and Expense RecognitionE7B. Moretti Company produces computer software that Fossil Company sells. Moretti receives a royalty of 15 percent of sales. Fossil pays royalties to Moretti semiannually—on May 1 for sales made in July through December of the previous year and on November 1 for sales made in January through June of the current year. Royalty expense for Fossil and royalty income for Moretti in the amount of $6,000 were accrued on December 31, 2013. Cash in the amounts of $6,000 and $10,000 was paid and received on May 1 and November 1, 2014, respectively. Software sales during the July to December 2014 period totaled $150,000.

1. Calculate the amount of royalty expense for Fossil and royalty income for Moretti during 2014.

2. Record the adjusting entry that each company made on December 31, 2014.

Accounting for Revenue Received in AdvanceE8B. Steve Martin, a lawyer, received $84,000 on October 1 to represent a client in real estate negotiations over the next 12 months.

1. Prepare the entries required in Martin’s records on October 1 and at the end of the fiscal year, December 31.

2. Accounting connEction ▶ How would this transaction be reflected on the income statement and balance sheet on December 31?

Adjusting EntriesE9B. Prepare year-end adjusting entries for each of the following:

1. Office Supplies has a balance of $336 on January 1. Purchases debited to Office Supplies during the year amount to $1,660. A year-end inventory reveals supplies of $1,140 on hand.

2. Depreciation of office equipment is estimated to be $2,130 for the year. 3. Property taxes for six months, estimated at $1,800, have accrued but have not been

recorded. 4. Unrecorded interest income on U.S. government bonds is $850. 5. Unearned Revenue has a balance of $1,800. Services for $750 received in advance

have now been performed. 6. Services totaling $800 have been performed; the customer has not yet been billed.

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Chapter Assignments 3

Preparation of Financial StatementsE10B. Prepare the monthly income statement, monthly statement of owner’s equity, and the balance sheet at August 31, 2014, for Morida Cleaning Company from the data pro-vided in the adjusted trial balance that follows. The owner made no investments during the period.

Morida Cleaning CompanyAdjusted Trial Balance

August 31, 2014

Cash 4,750

Accounts Receivable 2,592

Prepaid Insurance 380

Prepaid Rent 200

Cleaning Supplies 152

Cleaning Equipment 3,875

Accumulated Depreciation—Cleaning Equipment 320

Truck 7,200

Accumulated Depreciation—Truck 720

Accounts Payable 420

Wages Payable 295

Unearned Janitorial Revenue 1,690

C. Walsh, Capital 15,034

C. Walsh, Withdrawals 2,000

Janitorial Revenue 14,620

Wages Expense 5,680

Rent Expense 1,350

Gas, Oil, and Other Truck Expenses 580

Insurance Expense 380

Supplies Expense 2,920

Depreciation Expense—Cleaning Equipment 320

Depreciation Expense—Truck 72033,099 33,099

Determination of Cash FlowsE11B. BusinEss ApplicAtion ▶ After adjusting entries had been made, Reliance Com-pany’s balance sheets showed the following asset and liability amounts at the end of 2013 and 2014:

2014 2013Prepaid insurance $2,400 $2,900Wages payable 1,200 2,200Unearned fees 4,200 1,900

The following amounts were taken from the 2014 income statement:

Insurance expense $ 3,800

Wages expense 19,500

Fees earned 8,900

Calculate the amount of cash paid for insurance and wages and the amount of cash received for fees during 2014.

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4 Chapter 3: Adjusting the Accounts

Relationship of Expenses to Cash PaidE12B. BusinEss ApplicAtion ▶ Zodiac Company’s income statement included the following expenses for 2014:

Rent expense $ 75,000

Interest expense 11,700

Salaries expense 121,000

The related balance sheet account balances at year end for last year and this year follow.

Last Year This YearPrepaid rent — $ 1,350

Interest payable $1,500 —

Salaries payable 7,500 14,500

1. Compute the cash paid for rent during the year. 2. Compute the cash paid for interest during the year. 3. Compute the cash paid for salaries during the year.

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